After President Trump tweeted last Friday that he authorized “a doubling of Tariffs on Steel and Aluminum with respect to Turkey,” the Turkish lira fell more than 20 percent against the U.S. dollar during Friday’s trading. Since the value of the lira has already dropped more than 60 percent this year, Turkey is at the brink of a financial disaster.
Global investors are worried Turkey’s trouble may spread to other emerging markets and cause a new worldwide economic crisis. Turkey’s President Tayyip Erdogan pinned the culpability on the United States and social media. But he is the one to blame for Turkey’s financial woes and political instability.
Turkey Has Become an Authoritarian Regime
Turkey has been a NATO member since 1952. For decades, Turkey had been the most westernized Muslim country, with a strong secular government and functioning democracy. Its political system was long hailed as a model in the Muslim world.
By sending troops to the Korean War and other wars on NATO’s side, Turkey proved it was a reliable U.S. ally and a responsible NATO member. In 2004, the European Commission offered Turkey a formal invitation to begin negotiations for joining other western democracies as a member of the European Union.
However, since the election of Erdogan in 2014 (Erdogan was the prime minister for 11 years prior to 2014), the country has behaved more like an authoritarian regime than a democracy. As Erdogan consolidates power, he has been eager to suppress dissent and ruthlessly crack down on real and perceived enemies.
According to a report by Human Rights Watch, Turkey’s government has practically silenced all independent domestic media, including “the use of the criminal justice system to prosecute and jail journalists on bogus charges … physical attacks on journalists and media organizations; government interference with editorial independence and pressure on media organizations to fire critical journalists; the government’s takeover or closure of private media companies; and restrictions on access to the airwaves, fines, and closure of critical television stations.” Many journalists have been forced to flee the country.
Since a failed military coup in 2016, Turkey has been in a permanent state of emergency. Erdogan used the failed coup as an excuse to speed up his crackdown on media and the judicial system: “5,822 academics sacked, 189 media outlets shuttered and 319 journalists arrested or prosecuted. The country’s judicial system has been decimated, with 4,560 judges and prosecutors dismissed.” He has also purged many military personnel who opposed his policies and followers of the exiled Turkish cleric Fetullah Gulen.
Through a constitutional referendum in April 2017, Erdogan consolidated more power for himself by scrapping the role of prime minister, becoming both the executive and head of state and giving himself sweeping new powers to “appoint ministers, prepare the budget, choose the majority of senior judges and enact certain laws by decree.” Erdogan was so emboldened that he extended his authoritarian approach to the United States. During his state visit to the United States in May 2017, Erdogan’s security detail beat up protestors on U.S. soil.
Turkey Is No Longer a Good Ally
Despite being a long-time NATO member, Turkey under the leadership of Erdogan no longer acts like an ally. As Erdogan behaves more and more like a dictator, he has become closer with other authoritarian regimes like China and Russia while at odds with many NATO members.
He threatened the European Union with a migration surge after the European Parliament froze talks on EU membership for Turkey. He blasted the EU’s criticism of Turkey’s worsening human rights situation as a new “crusade against Islam.” Erdogan also let Russia drive a wedge in NATO by embracing more energy and military cooperation with Russia.
Since the failed military coup, Erdogan has repeatedly accused the United States of being complicit with the coup plotters. Turkey detained American pastor Andrew Brunson in October 2016 over trumped up charges to force the United States to hand over Gulen, a U.S. green card holder and Erdogan foe.
Despite receiving millions in U.S. military aid, Erdogan has done plenty to undermine U.S. policies in the Middle East. For example, the Turkish Army targeted the United States’s Kurdish allies, not ISIS fighters in Syria, and Erdogan warned the United States not to support the Kurds. In April, Erdogan also formed an alliance with U.S. adversaries, Iran and Russia, over the future of Syria, bypassing the United States,
President Obama chose to overlook Turkey’s human rights violations and undermining of U.S. policy and interests in order to maintain the alliance. This passive approach only emboldened Erdogan to ignore the United States’s request to release Brunson.
But President Trump chose to address Erdogan’s aggressions head-on. When Turkey refused to free Brunson, the United States announced sanctions on Turkey’s justice and interior ministers and banned U.S. citizens from doing business with them. Then came the Friday presidential tweet to increase trade tariffs on Turkey.
Turkey’s Financial Crisis is Self-Inflicted
Like other despots who successfully hijacked democracy, Erdogan easily won a second term in June. He quickly appointed his son-in-law as finance minister and put in place policies that could interfere with the independence of Turkey’s central bank.
Before the United States applied sanctions and tariffs, Turkey’s economy already showed troubling signs. Like many emerging markets, Turkey has relied on foreign currency-based debt to fuel its economic growth. Turkey’s foreign currency debt is more than 50 percent of its gross domestic product, one of the highest among emerging markets.
CNBC reports that Turkey has $181 billion in short-term debt denominated in currencies other than the lira. Compared to its debt level, Turkey’s government reserve doesn’t have enough firepower to rescue the economy if anything goes wrong. In addition to a high debt level, Turkey is running doubt-digit inflation. Its latest inflation rate is at 16 percent.
In a situation like this, the right move for the central bank is to raise the interest rate because “higher rates tend to attract foreign investors, who would need the lira to buy Turkish assets. That could in turn support the currency, which makes imports cheaper and lessens the burden of paying back foreign debt.”
But because Erdogan doesn’t like high interest rates, the Turkish central bank keeps the rate low, which essentially gives up the most effective tool to stop its currency free fall. The Trump administration’s sanction and tariff announcements only add fuel to fire.
Due to lack of confidence in Erdogan’s ability to manage Turkey’s economy and the concern over the growing diplomatic and economic tensions between the United States and Turkey, global investors continue to pull money out of Turkey, which further depresses the value of the lira. There is also a growing concern that Turkey’s financial crisis may spread to other emerging markets as investors flee to safety in developed economies like the United States.
Rather than taking responsibility for his mismanagement of Turkey’s economy, Erdogan upped his attack on the United States and called for boycotting U.S. goods, including Apple’s iPhone. Such about-face rhetoric is silly. Interestingly, Erdogan’s new pal, Russian President Vladimir Putin, hasn’t offered financial assistance to Turkey. China offered limited assistance. So did Qatar. But these won’t be enough to reverse the lira’s decline.
The only path forward to prevent Turkey and possibly other emerging markets from a financial crisis is: first, Erdogan has to let Turkey’s central bank do its job without intervention; second, Erdogan needs to repair his country’s relationship with the United States by releasing Brunson immediately and getting back to trade negotiations.
Last but not least, Erdogan needs to act like a responsible ally to the United States and other NATO members. Otherwise, what’s waiting for Turkey is nothing but a disaster.
